Hill's Personal Finance

Capital Adviser's August 2008 Outlook

This month our curmudgeon money manager explains why our economy has a cold with money center banjs making bad mortgages and selling them to hedge funds; then loaning money to the same hedge funds using those loans as collateral.

Download august_b_2008.pdf

What The Stimulus Did for America

The economic boost was strong, and some politicians want an encore.

Money in the mailbox, and relief for the consumer. The 2008 economic stimulus package didn’t reduce oil prices and didn’t solve the credit crunch, but it certainly tuned up the engine of the U.S. economy – consumer spending. We’ve just learned that personal spending went up by 0.8% in May, the largest gain in six months.¹

Want to hear something more impressive? Disposable income shot up 5.7% in May – the biggest monthly increase in 33 years. Additionally, overall income increased 1.9%, and the personal savings rate for May hit 5%, the highest rate since May 1995.¹

Clearly, the stimulus was a great economic aid at a point when gas prices and food prices were threatening the quality of life for the average American. It gave the consumer a break; it lifted morale. Even if the effect was “psychological”, let’s not forget how much psychology drives consumer purchases and the stock market.

A second stimulus? Some politicians want to see it happen, and it could happen, though it might not in 2008. As early as February, U.S. governors pressed President George W. Bush for a second stimulus package that would boost funding for state infrastructure repair and thereby create new jobs and build state economies. In May, House Speaker Nancy Pelosi (D-CA) called for a follow-up stimulus plan.² Earlier this month, House Financial Services Chairman Barney Frank (D-MA) echoed her opinion, stating that “additional fiscal stimulus is necessary.”³ On June 26, presidential candidate Sen. Barack Obama (D-IL) spoke of “a second stimulus package, another round of rebates, as well as a permanent $1,000 tax cut for individuals and families” affected by “rising costs”.⁴ Sen. John McCain (R-AZ) has also suggested he is open to the idea of a second stimulus package.

The Bush administration has stated that it wants to see the full effects of this stimulus package play out before considering any further action. On June 6, President Bush called on Congress to follow through on other types of measures that might help the economy, such as permitting the expansion of oil exploration in the U.S. and making tax cuts passed during his presidency permanent.⁵ With the Bush administration ending in January, the time horizon for any stimulus proposal originating from the White House is quite short. While calls for another stimulus have occurred since winter, the economy will likely dictate whether another package is needed.

Citations. ¹ cbsnews.com/stories/2008/06/27/business/printable4214926.shtml       [6/27/08]

² reuters.com/article/politicsNews/idUSWBT00892920080506         [5/6/08]

³ money.cnn.com/2008/06/06/news/economy/Mayjobs_secondstimulus/index.htm?postversion=2008060617          [6/6/08]

⁴ ap.google.com/article/ALeqM5hOV_Hg_3G-VQFn7u2kC9XnT36PPgD91HVQT80            [6/26/08]

⁵ cbsnews.com/stories/2008/06/06/national/main4161478.shtml?source=related_story             [6/6/08]

HOW THE DOLLAR AFFECTS THE ECONOMY

What happens when the dollar grows stronger or weaker?

Recently, Federal Reserve Chairman Ben Bernanke has hinted that the U.S. is going to try to strengthen or at least stabilize the weak dollar. So what might happen to the economy with a stronger dollar? And how has the economy been affected by a weak one?

Effects of a weak dollar. The dollar has fallen more than 40% versus the euro and 26% versus the yen in the last six years.¹ Its value has dropped 28% since 2001 compared to other benchmark currencies.² This devaluation has meant boom times for U.S. corporations and companies that do business overseas, reflected in their earnings reports (and in their stocks on Wall Street). A weak dollar also helps to shrink the U.S. trade deficit, which has slimmed notably in the last couple of years.

On the other hand, a weak dollar breeds inflation and drives up the prices of imported goods. It also helps drive investors to the commodities markets, as they turn to oil, gold and other hard assets for a hedge against inflation. Witness the amazing ascent of oil and gold prices.

Effects of a strong dollar. If the Fed raises interest rates (and some economists feel there may be a rate increase before 2008 ends), that could strengthen the dollar, tame inflationary pressures, and help to weaken oil prices. But it also risks crimping the economy further, given that the housing market has yet to pull out of its slump and that consumer spending is already pinched due to high energy and food prices. The U.S. could also strengthen the greenback by buying dollars in the foreign exchange markets, something that hasn’t happened since 1995.

That was the year U.S. Treasury adopted a strong dollar policy. Between 1995 and 2001, the dollar gained 29% in value against a basket of other major currencies.² However, because of that increase in valuation, demand for U.S. exports lessened, and that was a contributing factor to the 2001 recession.

Where are you putting your dollars? How is this economy affecting you, and where are you investing your money? A chat with a qualified financial advisor might be eye-opening - an advisor who is independent, and ready to work for your goals. Now is a good time to look ahead and plan for your objectives, with a financial strategy that will help you whether the dollar recovers or falters. Think about that today.

Citations.

¹ fool.com/investing/general/2008/06/05/bernanke-changes-strategy.aspx                [6/5/08]

² marketwatch.com/news/story/makes-economic-slump-different/story.aspx?guid=%7b8F4AB40B-962A-419C-A478-CAB86547EDFB%7d&print=true&dist=printMidSection       [5/19/08]

Monday Market Outlook 06/02/08

Brian Wesbury of First Trust Portfolios, LP gives his take on Cap and Trade provisions that are in the America's Climate Security Act.

Download cap_and_trade_trap.pdf

WHY ARE OIL & GAS PRICES SO HIGH?

When will they come down? What’s keeping them up?

What is going on? Before 2002, oil prices usually hovered around $20 a barrel. By early 2006, they were above $60 a barrel.¹ They were at $62 a barrel in May 2007.² One year later, oil prices have doubled. In October 2004, a gallon of regular unleaded gas averaged just under $2.00.³ Now it might cost you twice that.

Is this just a supply-and-demand story? Has demand for oil and gas doubled in the last four years? Have worldwide supplies shrunk notably over the same period? It’s a bit more complex than that. Let’s look at some of the factors analysts cite for the soaring prices.

The commodities market. We’ve seen a historic bull market in commodities recently, with oil, soybean, wheat, gold, and silver prices at record inflation-adjusted highs. It isn’t cooling down just yet. All the speculators investing in the commodities market have helped to drive prices higher.

The weak dollar. What fueled the commodities bull market? Many economists point to the dollar, which has declined about 35% in value against other benchmark currencies since February 2002.⁴ When the dollar weakens, investors tend to buy commodities like oil futures as a hedge against inflation. Also, when the dollar loses value against other currencies like the euro and the pound, it makes oil cheaper for overseas investors.

The Federal Reserve has signaled that it is through cutting interest rates for the near future, and many people think that this will boost the dollar’s value against other major currencies. (The dollar tends to slide when the Fed cuts the key interest rate.) So that may encourage a drop in oil prices, and in retail gas prices.

Sustained demand. If somebody told you to cut back on your driving, would you do it? Could you? Many Americans can’t. We complain about higher and higher gasoline prices, but we ultimately sigh and put up with them. In addition to ongoing American consumer demand for gasoline, industries worldwide demand crude oil. As the economies of

China

,

India

and other new major-league economic players have developed, their needs for oil and gas have correspondingly increased, raising demand a bit.

What will make prices fall? As mentioned, some analysts believe a recovering dollar will be the big factor. Others point to reduced worldwide demand for oil as an effect of record prices. OPEC has revised its demand forecasts downward twice in the last three months.⁵

Industrial needs aside, the American driver might be a major factor here. Change is occurring; SUV and truck sales are declining; people are adjusting their driving habits, and driving less. The

U.S.

is a prime market for oil exporters, and if consumer demand for gasoline lessens, oil prices seemingly have to fall. So your consumer sacrifice might send a message to Big Oil.

How is your money? When you see headlines about the economy, it may make you think of your financial situation, and what you might be able to do to improve it. In times like these, it’s a good idea to talk with a qualified financial advisor about topics like investing, saving and retirement. Think about scheduling such a talk today, for what you learn might help you not only this year, but for years to follow.

Citations. ¹ businessweek.com/magazine/content/06_06/b3970078.htm

² foxbusiness.com/story/markets/economy/oil-rises-time-high-near--barrel/

³ eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html                                             [Excel download]

⁴ ftalphaville.ft.com/blog/2007/11/07/8713/the-dollars-slide-13-down-and-falling-faster/

⁵ bloomberg.com/apps/news?pid=newsarchive&sid=ay3B20MjKdro

Shorting The Dollar? Good or Bad Idea

The current weakness in the dollar is causing all of us some inflation. Oil is higher , imports are higher. Conversely, it makes are products cheaper abroad. As Americans we feel pain because of this, but other countries that link their currency to ours feel more.

The dollar goes through trading cycles and we are in the trough of one now. Louis Basenese has written an article against shorting the dollar because it may be at its cyclical low. His thoughts show why suffering through these inflationary commodity times might actually create agreat strong dollar economy for those of us in the United States.

Monday Market Outlook 4/14/08

This week Brian Wesbury at First Trust Portfolios, LP dicusses the onslaught of inflation.

Download More_Inflation__On_Its_Way.pdf

Interest Rate Roundup

Bankrate.com has an interesting article on how different financial products interest rates have changed over the last few weeks. Check it out.

WHY GOLD WENT UP 30% THIS YEAR

The reasons behind the best gold market in a quarter-century.

What’s behind the jump in gold prices? This fall, gold topped $800 per ounce. We haven’t seen prices that high since 1980.¹ You may remember the drivers behind the 1970s bull market in gold: inflation around 15%, worries that OPEC would hold the global economy hostage, and the removal of artificial price controls during the Nixon administration. Today, the factors pushing gold higher are a bit different, but the main reason for gold’s rise is basically the same now as it was then. Investors are anxious about the economy, and in times of high anxiety, some investors turn toward gold.

#1: The credit crisis. The uncertainty that gripped the housing, banking and investment markets this year was a boon for gold. Around the globe, investors watched and worried this year as the U.S. housing slump deepened, fearful that America would fall into a recession and drag other economies down with it. That fear triggered a “flight to quality,” in the words of a World Gold Council official,² and sent demand for gold higher worldwide. As banking and real estate giants announced big losses on Wall Street, American investors also eyed hard assets, gold among them. Soaring crude oil and natural gas prices have also helped – rising oil and gas prices stir fears about inflation, and that is good for gold.

#2: A weak dollar. In addition to market demand, the soft dollar has also contributed to rising gold values. The dollar repeatedly fell to record lows against the euro and other core currencies this year. The Federal Reserve also cut interest rates three times in 2007. When the Fed cuts rates, it makes the dollar even less attractive to overseas investors, and the falling dollar helps to push up gold prices.

#3: Growing demand that is harder and harder to meet. Demand for gold is growing, especially in Asian investment markets. In fact, India is the world’s top gold consumer.³ It consumed about one-fifth of the world’s gold in 2006, and in 2007, its gold purchasing is on pace to rise 50%.⁴

However, while demand in emerging-market countries may be high, environmental regulations on gold mining have tightened considerably since the 1970s and made it less convenient and cost-effective. This is yet another reason why commodities analysts are bullish about gold in the future.

If you are thinking about investing in gold, do it carefully. Make sure you talk with a qualified financial advisor who understands the commodities markets.

Rate Cut?

Investors say “please.” The Fed says “wait” – but it might change its mind.

Will interest rates fall to 4.25% in December? With the drama on Wall Street last week, the Federal Reserve faces pressure to make yet another interest rate cut at its December 11th policy meeting, which would be the third rate cut within a 90-day period. A quarter-percent cut in December – a dim possibility two weeks ago – is now seen as a probability by some economists and stock market analysts.

Why the Fed doesn’t want to adjust rates again. The economy and the stock market are not synonymous. The Fed’s job is to care about the “real” economy, not to bail out Wall Street whenever investors beg “please.” Fed Chairman Ben Bernanke noted last week that the Fed is now “very dependent” on economic data to alter its position on rates, as opposed to stock market activity.¹ The Fed’s priority is to control inflation, and when you cut interest rates, you weaken the dollar and invite inflation. With oil and gas prices so high and credit-challenged consumers so pressured, rising inflation is the last thing the Fed wants to see.

Why the Fed might need to reduce rates once more. While the Fed would like to simply say “you guys are on your own” to Wall Street, it is not so easy. Yes, inflation pressures are mounting with the slumping dollar and soaring commodities prices. But at the same time, the growth of the whole economy is being threatened by tighter lending standards and the housing correction. The effects are visible on Wall Street. So the headlines and public clamor might sway the Fed, and fast.

Will it help? A rate cut is good for Wall Street, but it is not necessarily the answer for the economy. For months now, both market analysts and economists have warned of a “payback” coming to the

U.S.

economy in return for years of inflated real estate prices, stated-income loans and bad bets on subprime mortgages by lenders. Those tendencies have largely been curbed, but the economy is still wounded in many ways, and a rate cut may only be a band-aid.

How are you doing? As the year draws toward a close, it is time to look ahead, past the volatility of the short term to the long term. Regardless of what the Fed does in December, this is a good time to speak to a qualified financial advisor about the investment options you have and the ways you can plan for the growth and protection of your assets. Be wise, touch base today, and plan for tomorrow.